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Monetary Policy panel likely to continue status quo on policy repo rate

The monetary policy committee (MPC) is expected to continue its status quo on the policy repo rate at its upcoming meeting as the latest retail inflation reading, despite hitting a four-month low, is still above its comfort zone and there are upside risks from food inflation.

Moreover, with the GDP growth holding up at the current interest rate level, the MPC may want the cumulative repo rate hikes of 250 basis points, effected during May 2022-February 2023 period, to get fully transmitted into the lending rates.

The six-member MPC, which is scheduled to meet from December 6 to 8, 2023, has been on pause mode this financial year (FY24) so far. The last time MPC raised the repo rate (the interest rate at which RBI provides liquidity to banks and primary dealers to overcome short-term liquidity mismatches) was in February 2023, when it upped it from 6.25 per cent to 6.50 per cent.

The CPI (consumer price index)-based inflation (or retail inflation) dipped to a 4-month low of 4.87 per cent in October against 5.02 per cent in September. However, the latest inflation reading is cold comfort for the rate-setting committee, which is resolutely focused on aligning inflation to the 4 per cent target on a durable basis.

So, the MPC is likely to leave the repo rate unchanged even as it remains focused on withdrawal of accommodation to ensure transmission of past rate hikes.

GDP growth

Further, GDP growth in the second quarter at 7.6 per cent, coming on the back of a strong 7.8 per cent growth in the first quarter, shows that growth is well supported at the current interest rate level.

Economists expect the central bank to nudge up its FY24 real GDP growth projection of 6.5 per cent even as it retains the CPI inflation projection at 5.4 per cent.

In his speech at the FICCI-IBA summit last month, Governor Shaktikanta Das emphasised that over the last one-and-half years, the RBI’s monetary policy actions, consisting of prioritisation of inflation ahead of growth, narrowing the Liquidity Adjustment Facility (LAF) corridor, increasing the policy repo rate by 250 bps, draining out excess liquidity — together with supply side measures by the Government — have facilitated significant softening of headline inflation to 4.9 per cent in October 2023. “The moderation in core inflation (to 4.4 per cent from 4.6 per cent a month ago), in particular, is noteworthy. There is also recent evidence of household inflation expectations becoming more anchored,” he said. 

Headline inflation, however, remains vulnerable to recurring and overlapping food price shocks coming from global factors and adverse weather events. “The frequency and intensity of such shocks have increased in the recent period. Monetary policy in such a scenario needs to remain watchful and actively disinflationary while supporting growth,” he said.

Expert view

Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, expects the MPC to remain on a cautious hold, keeping the repo rate unchanged at 6.50 per cent. 

He opined that the central bank may flag risks to inflation from a potential recurrence of food price shocks and its impact on inflation expectations, even as it draws comfort from the moderation in core inflation. “Domestic growth still seems to be holding up, and with the Q2 FY24 GDP growth print springing a positive surprise, we think the RBI will have little concern over the growth momentum. 

“The MPC is likely to flag a moderation in the pace of monetary transmission, as spreads of lending rates over the repo rate have narrowed in the past few months. Accordingly, we expect the committee to maintain the monetary policy stance pointed towards a withdrawal of accommodation despite deficit liquidity conditions,” Bajoria said.

Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research, observed that in the upcoming MPC meeting,theRBI is expected to take note of the stronger growth momentum in the current year and the likelihood of a fresh build-up of inflationary pressures particularly if food inflation gets affected by the El Nino weather events. “However, a sustained pause is the most likely scenario although the system liquidity may be kept relatively tight. Any rate cut decision appears unlikely over the next six months,” he said.


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